Canada’s fiscal success story

Brian Lee Crowley is managing director of the Macdonald-Laurier Institute, a public policy think tank in Ottawa, and co-author of “Northern Light: Lessons for America from Canada’s Fiscal Fix.”

As Washington’s fiscal profligacy is debated, few have pointed to a tremendous budgetary turnaround achieved in the mid-1990s. Over just a few years, between 1995 and 1998, Canada transformed a $32 billion federal deficit, equivalent to 4 percent of its gross domestic product, into a $2.5 billion surplus. This achievement was followed by a full decade of surplus budgets, with debt, tax and poverty rates all falling as growth, investment and employment rose.

Yet the most important lesson isn’t what Canada did but how the Canadians did it. Listen to the debate between Republicans and Democrats, and it is clear that neither major U.S. party understands what took place in Canada. No one is proposing Canadian-style reform. This is a pity: Not only did reform work north of the border, but it was politically popular, too.

Here are six lessons from that success:

First, while all three major political parties claimed to want to repair Canada’s deteriorating fiscal position, politically speaking it was almost impossible for any of them to tackle it alone. Attempting to do so would have allowed the other parties to outflank them, claiming that this or that policy was too extreme.

Washington is still caught in this mentality. Democrats mount a lopsided defense of social programs and higher taxes on “the rich,” while Republicans typically denounce any tax increases or cuts in military spending. In Canada, progress on the deficit became possible only when the parties ceased to treat it as a matter of partisan contention and, instead, saw it as a vital national interest.

It helped that the left-leaning New Democratic Party of Saskatchewan was the first government in Canada to discover the limits of deficit financing. Its realization that someday the bill for massive government borrowing would come due was soon followed by the conservative government of Alberta and then by the center-left liberal government in Ottawa.

Governments of every stripe came to sing from the same song sheet, the most famous refrain of which came from Paul Martin, then the federal finance minister, who pointed out when announcing reforms that the deficit is not an invention of ideology but a fact of arithmetic. Eventually, every political party came to see that it had skin in the game. No one could attack one party as too extreme because each owned some part of the process.

Lesson No. 2: Politicians quickly learned that they couldn’t play favorites, carving out exemptions for friends and socking it to their opponents. If fixing the deficit was a challenge for the nation, then the whole nation had to be called upon to contribute. No carve-outs were permitted for defense or social programs. Taxpayers not reliant on public spending were expected to contribute through higher taxes, though spending cuts exceeded revenue increases by five-to-one.

Lesson No. 3: Once reforms were underway, time was of the essence. Proceeding piecemeal would have undermined the broad social consensus and would have delayed the handsome payoff that Canadians enjoyed once they had broken the deficit cycle.

Lesson No. 4: The spending cuts at the heart of reform took account of the ability of program beneficiaries to bear the burden. Rather than an arbitrary mentality or mandating “across the board” cuts, Canadians tested spending programs against clear criteria, relentlessly seeking real value for money.

Lesson No. 5: A simple, easy-to-understand target was critical to rallying public support. Eliminating the deficit became something of a national obsession, and there was a palpable wave of national pride once it was achieved. Canada showed that if you get all the other elements right, the supposedly insurmountable institutional obstacles to reform often prove to be paper tigers. A case in point is the Canadian Pension Plan, Canada’s equivalent of Social Security. Reform required approval from not only the federal government in Ottawa but also seven of the provincial governments — the equivalent of needing Washington and a large majority of state legislatures to sign off on changes to Social Security. Even so, the Canadians managed to do what the U.S. Congress has not.

The takeaway for American politicians is that thoughtful reform, cleverly managed, paid handsome political dividends. The Liberal government of Prime Minister Jean Chrétien, which introduced these changes in 1995, was handily reelected in 1997 and 2000, and reforming provincial governments enjoyed similar success.

Surely the American political class is no less capable than its Canadian counterparts of taking up this challenge. It can strengthen the nation while bolstering its own political fortunes.